VAT on Office Refurbishment and Dilapidations Explained

Office refurbishment and fit-out works in the UK are usually standard-rated for VAT at 20%, while a dilapidations settlement paid by a tenant to a landlord as damages is generally treated as compensation and outside the scope of VAT; if the tenant carries out the works instead, the builder charges VAT on those works in the normal way.

VAT can be complex, so take advice from your accountant on your circumstances. Office Refurbishment London shows VAT clearly on every quote, so you can see the net and gross cost of the works.

Is VAT charged on office refurbishment?

Yes, in most cases. Building work on existing commercial buildings, including refurbishments, fit-outs, strip-outs and reinstatement, is standard-rated at 20%. The relief that once zero-rated approved alterations to listed buildings was withdrawn in 2012, so listed office buildings are generally standard-rated too. Our UK office refurbishment cost guide quotes figures excluding VAT, as most quotes do.

Work out a budget for your own floor area, scope and location with our office fit-out cost calculator.

Can you reclaim VAT on an office refurbishment?

A VAT-registered business can usually reclaim VAT on refurbishment costs as input tax, to the extent that the costs relate to its taxable business activities. Businesses that make exempt supplies, such as many in financial services, insurance and some charities, may only be able to reclaim part of the VAT under partial exemption rules. For those organisations, VAT is a real cost and should be included in the budget.

Does the Capital Goods Scheme apply to refurbishments?

It can. The Capital Goods Scheme applies where VAT-bearing capital expenditure on refurbishing or fitting out a building is £250,000 or more, excluding VAT. Under the scheme, the VAT recovered is adjusted over a period of up to ten years if the use of the building changes between taxable and exempt activities. It matters mainly to partially exempt businesses and landlords. Your accountant can confirm whether it applies.

Is VAT payable on dilapidations?

Generally, no. A dilapidations payment is usually compensation for the tenant's breach of the lease covenants rather than payment for a supply of goods or services, so it is outside the scope of VAT. The landlord does not charge VAT on the settlement, even if it has opted to tax the building, and the tenant cannot reclaim VAT on it.

Can a landlord include VAT in a dilapidations claim?

Sometimes. If the landlord would incur VAT on the cost of doing the works and cannot recover that VAT, for example because it is not VAT registered or is partially exempt, it may claim the VAT as part of its loss. If the landlord can fully recover VAT, a claim for VAT is unlikely to be justified. This is a point to test in negotiations.

What if the tenant does the dilapidations works?

When the tenant carries out the works before the lease ends, the builder charges VAT on its invoices to the tenant at the standard rate. A VAT-registered tenant making taxable supplies can usually recover that VAT. Comparing the cost of doing works with a cash settlement should therefore consider VAT: a tenant who can recover VAT on works but cannot recover anything on a settlement may find the comparison changes. Our guide to what dilapidations are compares the two routes.

When could a dilapidations payment be taxable?

If the payment is not really compensation, the treatment may change. For example, a payment by a tenant to be released early from a lease, called a surrender payment, may be standard-rated if the landlord has opted to tax the building. Where a payment covers several things, the VAT treatment of each part needs to be considered. Clear wording in the settlement agreement helps.

People reading this often go on to ask about office strip-out.

How does VAT work on service charges for refurbishment?

Where a landlord refurbishes common parts and recovers the cost through the service charge, VAT on the service charge usually follows the VAT treatment of the rent. If the landlord has opted to tax, the service charge is normally standard-rated. Tenants who can recover VAT usually reclaim it.

What about converting offices to homes?

Converting a non-residential building such as an office into dwellings can qualify for a reduced 5% rate on certain building work, and the first sale or long lease of a converted dwelling by the person converting it can be zero-rated, if strict conditions are met. These reliefs do not apply to office-to-office refurbishments.

Does the option to tax affect a refurbishment?

The option to tax is a landlord's election to charge VAT on rent and on sales of a commercial building, which in turn lets the landlord reclaim VAT on costs such as refurbishment. A landlord who has opted to tax can normally recover VAT on refurbishing the building, and charges VAT on the rent to tenants. A landlord who has not opted to tax makes exempt supplies of the building and generally cannot recover VAT on refurbishment costs. This affects the true cost of refurbishment for landlords and the VAT on rent and service charges for tenants.

How should a dilapidations settlement agreement deal with VAT?

The agreement should say what the payment is for, ideally in terms that make clear it is compensation for breach of covenant, and state the parties' understanding of the VAT treatment. If it also covers other matters, such as an early surrender or the release of other obligations, the payment may need to be split. Both sides' advisers should agree the wording before signing, as it is hard to change later.

How should you budget for VAT?

Get a clear, VAT-itemised quote

Every quote we provide lists the net cost, the VAT and the total, so your finance team can plan cash flow. Request a quote and we will be in touch. For the dilapidations process, see our guide to the Dilapidations Protocol and our guide to office dilapidations in London.

Frequently asked questions

Related guides

• Office Fit-Out Cost per Sq Ft and per m² in London (2026)
• Cat A vs Cat B Fit Out: What’s the Difference? (2026)
• Office Dilapidations in London: A Tenant’s Guide
• Dilapidations Claims and Section 18 Caps Explained
• The Dilapidations Protocol: Steps and Timescales Explained
• Office Fit-Out Cost Calculator London (2026)
• Office refurbishment and fit-out in London
• Areas of London we cover